1. Basics of Balance Sheet, Cash Flow & Income Statements
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2. Commit This Diagram to Memory
Balance Sheet #1
Balance Sheet #2
Cash Flow
Meeting Financial Obligations
Good old fashion recordkeeping
Financial Snapshot
Financial Snapshot
Income
Statement
(Profitability)
Statement of cash flow
(Sources & uses of money)
Working Capital
Debt/Asset Ratio
Net Worth
Working Capital
Debt/Asset Ratio
Net Worth
We start by asking you to commit this image to your memory. This is how important financial documents fit together to give you information for making good decisions. The balance sheet is a single day of your business and personal wealth. Much like you take family pictures at a special time of the year and then line them up to see progress, this is the role of the balance sheet. A single day in time, one year apart, year after year establishes a trend for your business and personal life.
The day to day financial activities are called cash flow, money deposited from sales of commodities, checks written to pay bills, etc. You might be checking your cash flow budget to see when you can expect to see money appear and disappear. It is pure professional to see a shortfall coming and deal with it instead of reacting to a shortfall and create stress. Cash flow is a plan to keep money productive moving you towards your goals. [AT THIS POINT YOU CAN SHARE RESOURCES LIKE RECORD BOOKS EITHER PAPER COPY OR ELECTRONIC, FAVORITE RECORDKEEPING SOFTWARE ETC. . . ]
Once a year we stop to measure progress. That is the role of the income statement (NOT INCOME TAX). It tells us if the farm made money. Lenders will usually ask for Schedule F from your income tax filing as a substitute for an income statement, but think about it. For legitimate tax reasons and good tax planning you’ve just done everything in your power to make the income line low. The income statement reflects reality for a period of time, usually a year, and is an accrual accounting document which simply means you see all income and expenses in the year they were received or incurred. After doing an income statement, you can construct a statement of cash flow, which simply breaks down the SOURCES of income and USES of money. We won’t be going into this particular document with this lesson, but just so you know it’s there for the next in depth program we do with you.
The income statement is the bridge between two balance sheets. Profits or losses from the operation will show up in the next balance sheet you construct. Profits add to net worth, losses reduce net worth. Other things that can affect your balance sheet are changes in inventory, grain, livestock, supplies, etc.; and the valuation of items at the time your put your balance sheet together. For example, your land was worth $100,0000 on the balance sheet from a year ago. Now, a year later when you are valuing your land again, it may be worth $105,000. These are assets that appreciate. Machinery assets and buildings/grain storage are depreciating assets so they will be less in value than the year before if you’ve done nothing to upgrade equipment. Okay, everybody got the image in your head?

3. Current Non Current Net Worth = Assets - Liabilities
Balance Sheet as of [a single date] Consolidated Personal Business
Current Assets
Current Liabilities
Current
Non Current Assets
Non Current Liabilities
Non Current
Good, now lets look at the structure of a balance sheet and what we need to include in this document. (refer to handout: Understanding Your Financial Health; Getting Ready to Complete a Balance Sheet)
[AS EACH SECTION COMES UP MAKE THIS AN INTERACTIVE DISCUSSION TIME WITH AUDIENCE. EXAMPLE: GIVE ME AN EXAMPLE OF SOMETHING THAT FITS IN THE CURRENT ASSET CATEGORY. SOMETIMES YOU HAVE TO CORRECT SOME ANSWERS BUT THAT’S ALL PART OF THE LEARNING.]
[AT THIS TIME WE ALSO POINT OUT THE DIFFERENCES IN SOME BALANCE SHEETS. EXAMPLE: SOME FORMS INCLUDE AN INTERMEDIATE ASSET AND LIABILITY SECTION.
EXAMPLE: SOME FINANCIAL PROGRAMS WILL GIVE YOU A BALANCE SHEET WITH ASSETS LISTED AT THE TOP OF A PAGE AND LIABILTIES BELOW.
Net Worth or Owner Equity
Net Worth = Assets - Liabilities

4. Income Statement Structure
Revenues
Gross Revenues (example: $500,000)
Operating Expenses (example: $250,000)
Depreciation Expenses (example: $ 50,000)
Total Operating Expenses (example: $300,000)
Diff. between revenue & Expenses is
Operating Margin ($200,000)
Financing Expenses
Total Financing Expenses (example: $25,000)
Net Farm Income from Operations $175,000
Income statements can look pretty busy, but with a few lines we can show you the basic divisions of an income statement: You each should have the handout Income Statement Items in front of you.
Top of an income statement summarizes all revenues.
The middle section of an income statement summarizes operating and depreciation expenses.
The difference between gross revenue and operating expenses including depreciation is the operating margin.
The third section is financing expenses, further reducing operating margins to the Net farm Income from Operations.
For now this is were we’ll stop with this exercise. Be aware there are a few more steps, but we’ll save that for later.
Uses for Net Farm Income include, family living withdrawals, paying down debt (principle payments), or new money for investment in savings or other assets.

5. Key Ratios From the Income Statement
Financial efficiency ratios come from the income statement. The following four categories are looked at as a percentage of gross revenues.
Operating expenses—50%
Depreciation expense—10%
Interest expense—5%
Net Farm Income—35%
Distribute benchmarks for financial ratios and explain that these are a standard set of ratios set by the Council for Farm Financial Standards. Since we are not here to turn you into accountants, we are going to focus on a few key ratios.
Have the class put stars by the Financial efficiency ratios and have them make judgments about the ratios they see on the screen. They should be encouraged to work together and then give their answers.

6. Key Ratios From the Balance Sheet
Working Capital
Debt/Asset Ratio
Net Worth
We are now going to look at some sample balance sheets and make some financial judgments using the three ratios you see on the screen. For this exercise a calculator will be helpful.
Green Paper—Balance Sheet Exercise
Benchmark Ratios

7. Your Turn to Fill Out a Balance Sheet
Investing for Farm Families has a very user friendly balance sheet that has a personal balance sheet as well as a business balance sheet. On completion you will see a completed balance sheet and distribution diagram between personal and business assets.
[ASSUMING THE CLASS HAS COMPUTERS IN FRONT OF THEM THIS IS A HANDS ON EXERCISE. IF COMPUTERS ARE NOT AVAILABLE THIS IS A DEMO PRESENTATION] Distribute exercise.